A Crisis Early Warning Model for Euro Area Countries

13 Pages Posted: 17 Dec 2019

Date Written: November 25, 2019


The article summarises the findings obtained in the estimation of an economic crisis early warning model for the euro area countries. These findings show that monitoring five variables that may indicate the emergence of macro-financial imbalances – current account balance, unit labour costs relative to the rest of the euro area, household indebtedness, corporate indebtedness and sovereign risk premium – helps facilitate the early detection of downturns in the euro area countries. As expected, the model points to a widespread euro area-wide increase in the probability of a decline in activity towards the middle of the last decade, just before the start of the Great Recession. Compared with the core euro area economies, the increase in crisis probability was much more pronounced in the periphery countries, driven by a worsening of the current account balance, growing private sector indebtedness and deteriorating competitiveness. In several of these economies, the probability of downturn predicted by the model heightened in 2011-2012, coinciding with the successive sovereign debt crisis episodes. Since then the probabilities of downturn have moderated substantially and are now low in most countries, albeit in some cases still above those observed at the turn of the century.

Keywords: early warning indicators, vulnerabilities, economic crisis forecasting

JEL Classification: C25, C33, E44, E58, G01

Suggested Citation

Gonzalez Minguez, José Manuel and Martinez-Carrascal, Carmen, A Crisis Early Warning Model for Euro Area Countries (November 25, 2019). Banco de Espana Article 35/19, Available at SSRN: https://ssrn.com/abstract=3504778

José Manuel Gonzalez Minguez (Contact Author)

Banco de España ( email )

Alcala 50
28014 Madrid
+34 91 338 5518 (Phone)
+34 91 338 6190 (Fax)

Carmen Martinez-Carrascal

Banco de España ( email )

Alcala 50
Madrid 28014

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